EPC CONTRACTING: ENERGY
SECTOR
Legal, Taxation, Commercials and Risk
K E Y L E G A L I M P E R AT I V E S OWNER AMD CONTRACTOR
PERSPECTIVES
Deepto Roy
Partner
PXV Law Partners
STRICTLY PRIVATE – NOT FOR CIRCULATION
7th-8th November, 2012, Crowne Plaza Today,
New Delhi
“It is not enough to attain a degree of precision which a person reading
in good faith can understand. It is necessary to attain, if possible, a
degree of precision which a person reading in bad faith, cannot
misunderstand”
-
Justice Stephen, quoted in “Practical Legislation”
By Long Thring (1902).
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INTRODUCTION
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EPC Contracts- Risk Analysis and Allocation
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Owner and Contractor Considerations in EPC Contracts
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Key focus areas
 Risk and Title: pass through issues
 Liquidated Damages
 Limitation of Liability
 Force Majeure
 Suspension, delay and termination of contract
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CONTRACTUAL MATRIX IN AN
INFRASTRUCTURE PROJECT
Sponsor Support
Sponsors
Shareholders
Agreement
Lenders
Loan Agreement
Security Documents
Government
Government
Support
Implementation
Agreement
Fuel Supply Contract
Engineering,
Procurement,
Construction Contracts
O & M Contract
Offtake Contract
Offtaker
Fuel Suppliers
Operator
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EPC
Contractors
RISK MATRIX
Country and Regulatory
Risks
Specific Project Risks
Development
Risk
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Political Risk including
expropriation risk
Country Legal
infrastructure Risk
including regulatory
risk and legal
enforcement risk
Physical infrastructure
risk
Foreign Exchange Risk
Devaluation Risk
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Planning Delay
Risk
Approval Risk
Land
Acquisition
Risk
Construction Risk
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Design Risk
Delay Risk
Specifications Risk
Delay Risk
Completion Risk
Cost Overrun Risk
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Material
Cost
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Labour Cost
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Equipment
Cost
Force Majeure Risk
Compliance Risk
Operation Risk
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Technical Risk
Demand Risk
Input Risk Delay
Risk
Performance
shortfall
Approval Risk
Land Acquisition
Risk
Cost Escalation
Risk
Management Risk
Compliance Risk
CONTRACTUAL MECHANISMS TO
ADDRESS RISK
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Fixed Price, Lump-sum, “Turn-key” Contracts with limited provisions in relation to price
escalation
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Contractually prohibiting changes in scope of works without variation/ change orders
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“Time is of essence”- strict compliance of timelines and limited grounds for claiming an
extension of time
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Strict performance targets, usually for project output, efficiency and reliability, which the
facility must meet
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Testing and rejection rights
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Liquidated damages for delay and underperformance
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Independent payment security mechanisms
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Extended warranties (defects liability, latent defects liability)
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Passage of risk and title
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KEY OBJECTIVES OF THE OWNER AND
THE CONTRACTOR
Owner’s Objectives
Contractor’s Objectives
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Rational allocation of risk
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Pass-through of taxes and other
external costs
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Extension of time and increased costs
for delay as a result of circumstances
beyond the contractor’s control
Certainty of costs with limited
escalation
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“Back-to back” with project contracts
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Adherence to timelines and time for
completion
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Compliance with specifications and
warranties
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Force Majeure protection
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Pass-through of compliance risk
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Timely payment
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Interface with other contractors
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Certainty of total outside liability
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Single point of contact and
responsibility
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LIQUIDATED DAMAGES
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Liquidated damages (LDs) are pre-quantified damages which the parties to a contract agree
shall be payable in case of breach of such a contract.
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Provides certainty where damages are difficult to ascertain, for example in case of delay
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Typically subject to aggregate caps
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Acts in two ways, provides certainty to the claimant of the amount that can be claimed and also
provides a limitation to the liability of the contractor
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Legal Basis- Section 74 of the Indian Contract Act, 1956 - in case a contract is breached by a
defaulting party and such a contract provides for a specific sum to be paid in case of such a
breach, then the non-defaulting party is entitled to receive reasonable compensation not
exceeding the amount so specified
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Typically for delay and underperformance, but can sometimes address specific issues, e.g.,
EHS liability
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Delay Liquidated Damages (DLDs) are usually expressed as a rate per day which represents
the estimated extra costs incurred (financing charges, supervision fees etc.) and losses suffered
(revenue foregone) for each day of delay
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Performance Liquidated Damages (PLDs) are damage that the facility will suffer over its life if a
specified technical characteristic is not met.
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… LIQUIDATED DAMAGES
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Key legal issues in relation to the LDs are:
• No need to prove the quantum of damages if the damages have been specified in the contract,
but some loss needs to be proved. Union of India v. Raman Iron Foundry, (1974) 2 SCC 231).
• Cannot be in the nature of a penalty
• The damages stipulated would be a cap, i.e. a court would not award damages in excess of the
amount specified - Fateh Chand v. Balkishan Das (AIR 1963 SC 1405)
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Supreme Court in the case Oil & Natural Gas Corporation Ltd vs. Saw Pipes Ltd (AIR 2003 SC
2629) has laid down the following principles to be considered while awarding damages:
 The terms of the contract are required to be considered before arriving at a conclusion on
whether a party claiming damages is entitled to the same;
 If the terms stipulating liquidated damages are clear and unambiguous, the party who has
committed the breach is required to pay such compensation, unless it is proved that such
estimate of damages/compensation is unreasonable or is by way of penalty.
 In every case of breach of contract, person aggrieved by the breach is not required to prove
actual loss or damage suffered by him. The Court is competent to award reasonable
compensation in case of breach if the non-defaulting party proves that it has suffered some
loss.
 In some contracts, it is not possible for the Court to assess the actual loss arising from breach
and the Court can award damages, as stipulated by the parties, if such damages are a genuine
pre-estimate of the losses that may be incurred.
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… LIQUIDATED DAMAGES
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Some drafting issues in relation to liquidated damages clauses
• Performance LDs and Delay LDs should be drafted separately
• “Prevention Clause”- in case delay is as a result of failure by the Owner or another of the
contractors employed by the Owner.
• Treatment of “Concurrent Delays”, i.e. where different causes of the delay overlap, some
by the Owner and some by the Contractor
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Exclusive Remedy Clause
• If the contract contains an exclusive remedy clause, then the Contractor will only be
liable to liquidated damages for the specific events and not for any other damages
• Owner does not have a right to claim damages other than LDs- risk that certain events
will be excluded from liability
• If no exclusive remedies clause is there, Owner is free to seek damages in law for other
breaches
• Failsafe Clause- in case the liquidated damages clause is held to be unenforceable
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LIMITATION OF LIABILITY
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The clause helps in identifying and limiting the liability of the Contractor in relation to the works
done under the contract
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Covers three main aspects
 Nature of liability, i.e. the remedies that the Owner will have against the Contractor, such
as damages, indemnity or replacement of goods or reconstruction of portions of the
infrastructure in case the Contractor is in breach of the Contract.
 Extent of liability i.e. the maximum aggregate liability that the Contractor may incur.
 Duration i.e. the period during which the Contractor may be held liable. The Contract may
provide for different time period for which the Contractor will be liable for different aspects of
the project. For example, a defect liability period may be 1 year from the date of completion
of contract, whereas liability latent defects may extend up to 3 to 5 years.
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Sitaram Brindavan v Chiranjilal Brinjlal, AIR 1958 Bom 291. In law, parties have the right, by
contract, to exclude certain remedies and liabilities, including the right to claim damages
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Overall liability is almost always capped at 100% of the Contract price
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DLDs and PLDs are individually capped as well as capped in aggregate
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Consequential and indirect damages are excluded- Hadley v Baxendale, (1854) 9 Exch 341.
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Specific exceptions for gross negligence or fraud, or incidents such as death or injury.
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Limitation on liability clauses are always strictly interpreted and any limitation and exclusion
agreed between the parties must be clearly specified for them to be excluded
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FORCE MAJEURE
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One of the most important clauses in the contract- typically receives little drafting attention
An event “that can be neither anticipated nor controlled” and is not “reasonably foreseeable”
The Indian Supreme Court has noted that “force majeure” is not a mere French version of the
Latin expression “vis major”. It is a term of wider import and encompasses situation which may
not qualify as “vis major”. The Supreme Court has held that “where reference is made to "force
majeure", the intention is to save the performing party from the consequences of anything over
which he has no control. This is the widest meaning that can be given to "force majeure”.
[Dhanrajamal Gobindram v. Shamji Kalidas, 1961 SCR (3)1020]
Force Majeure is a civil law concept and the only common law analogy, is the doctrine of
frustration (Section 56 of the Indian Contract Act, 1956). However, since the scope and
applicability of doctrine of frustration is significantly different, parties contractually agree on a
force majeure clause.
“Sphere of influence” concept
Force Majeure of Subcontractors- included or excluded?
Impact on the “Critical Path”
WHAT DOES NOT CONSTITUTE FORCE
MAJEURE
Unless expressly specified by the parties, the following have been held to not qualify as events of force
majeure:
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Events which merely increase the cost of performance of the contract (Amuruvi Perumal v. Sabapathi Pillai,
AIR 1962 Mad 132)
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An order of restraint passed by a court in proceedings brought before it by a party to the contract does not
amount to an act of the government and has been held to not constitute event of force majeure [Interore
Fertichem Resources SA v. MMTC of India Limited, Delhi High Court, judgment dated 10 October 2007]
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Changes in law that make the performance of the contract more onerous commercially (but not impossible to
perform) than what is contemplated at the time of entering into the contract (Naihati Jute Mills Ltd. v.
Khyaliram Jagannath, AIR 1968 SC 522)
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Delay by a supplier, who is affected by an event of force majeure unless affected party can prove that it could
not have procured the goods form another supplier (Shri M.L. Narang v. Union of India, Delhi High Court,
judgment dated 15 December 2003)
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Bad weather conditions, which usually interrupt work (Matsoukis Vs Priestman & Co, 1915 1 KB 681)
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KEY ISSUES IN THE FORCE MAJEURE
CLAUSE
Issues
Owner’s Perspective
Contractor’s Perspective
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To minimise instances where a force
majeure clause may be invoked, expressly
state events which are foreseeable and
may be excluded from the definition.
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Expressly state events, which may
adversely affect the performance of the
obligations by the Contractor, such as
labour disputes, change in law etc.
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Consider if force majeure affecting subcontractor shall be included.
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Clause must provide that the obligations of
the contractor will stand suspended during
the period that the event of force majeure
continues.
Usually, the clause will state the maximum
period for which the obligations of the
Parties will stand suspended, after which
the Parties may terminate the contract.
Contractor should have time to restart
activities once the force majeure event has
ceased
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Definition of force
majeure
Effect of force majeure
event on the
obligations of Parties
under the Contract
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Usually, the obligation of the owner to
pay the contractor for the work already
undertaken is not affected by an event
of force majeure.
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Procedure for invoking
the Force majeure
clause
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The clause must state that the accrued
rights and liabilities of the Parties will
not be affected by the happening of an
event of force majeure.
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Clearly outline the procedure for invoking force majeure clause such as giving particulars of
the event of force majeure, providing supporting documentation, giving an estimated duration
for which the event would last etc.
KEY ISSUES IN THE FORCE MAJEURE
CLAUSE
Issues
Owner’s Perspective
Contractor’s Perspective
Obligations of the Parties during
event of force majeure
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Provide that the Contractor will take
all measures to minimize and
mitigate damage/losses to the
project.
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Contractor’s obligation must be
limited to taking all
“commercially reasonable
measures” to comply with the
obligation to mitigate losses.
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Provide for regular reporting
requirements.
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Right to discuss and re-work the
time schedule for the project.
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Negotiate provisions enabling
escalation of contract price if
substantial delay is caused due
to an event of force majeure.
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Taking insurance for mitigating
losses may be considered and
included in the project costs.
Allocation of costs
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Ensure that the Contractor is liable to
bear its own costs and risks in relation to
the happening of an event of force
majeure.
SUSPENSION
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Under an EPC contract either the Owner (in case of emergencies, interface issues or breach by
the Contractor) or the Contractor (in case of breach by Owner and non-payment) can suspend the
Contract
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Also invoked in case of change in circumstances that make it impossible to carry out construction
in the short run
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During suspension the obligations of the contracting parties continue as the Contract is not
terminated.
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Once the suspension is lifted parties must resume performance under the Contract
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Consequences of Suspension- Extension of Time and Increased Costs
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TERMINATION
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A termination clause in a contract usually is of two types:
 For convenience; and
 For cause or on default.
 Termination for convenience:
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Termination for Cause
 Contractor’s Right to terminate
 Non payment of contract price
 Material Breach by Owner
 Owner’s Right to Terminate is usually wider
 Failure to meet the time for completion
 Underperformance
 Aggregate limits of LDs having been exhausted
 Other termination events
 Insolvency
 Prolonged force majeure
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KEY OBLIGATIONS ON TERMINATION
Issues
Owner’s Perspective
Contractor’s Perspective
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If termination is due to default of owner
then the payment under different
categories should be subject to the
ceiling of the total contract price.
An owner may want to limit payment to
price of completed works only.
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Return of possession by contractor of
equipment in which title has passed to
the owner.
Right to take possession of the work in
progress
Avoidance of obligation to purchase
contractors’ equipment on termination.
Step into the shoes of the contractor in
relation to the sub-contractors
Right to complete construction
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Termination Payment
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Return of Contractor
Equipment and Subcontractors
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In case of default by contractor, it will
attempt to limit its liability to the cost of
completing of construction in excess of
value of works as on the date of
completion.
The Contractor would limit its liability to
pay other costs, forfeiture of retention
money etc. as such clauses may be in the
nature of penalty.
The contractor may want the owner to
purchase other equipment upon
termination.
In the absence of obligation on owner to
purchase its equipment, the contractor will
have to remove it from the site at its own
cost.
Release of liability in relation to subcontracts
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Other Obligations of Contractor include prompt return and delivery of various project related documents,
assignment of sub-contracts to the owner upon termination, discontinuation of all purchase activity and sub-contracting
and co-ordinating and co-operating with the new contractor.
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THANK YOU
Deepto Roy
[email protected]
+919654400716